S-D Logic Foundations of Service-Dominant Logic Naples Forum on Service Capri, Italy June 17, 2009 Stephen L. Vargo University of Hawai’i at Manoa Robert F. Lusch University of Arizona

S-D Logic Suddenly, Service(s) is Everywhere Service-oriented architecture Software-as-a-service Service systems Services science

S-D Logic The Message

S-D Logic The Prelude: The Blasphemy of the Alternative Logic There is no new service economy There are no producers and consumers Goods are not “goods.” Firms do not create value There is no B2C There are no services There are no markets And yet there are

S-D Logic The meaning of logic The underlying philosophy for organizing and understanding a phenomena Pre-theoretical Paradigm level of thought The lens that provides the perspective Different from formal scientific and mathematical logic

S-D Logic The Importance of the Right Logic Without changing our pattern of thought, we will not be able to solve the problems we created with our current pattern of thought Albert Einstein The greatest danger in times of turbulence is not the turbulence: it is to act with yesterday’s logic. Peter F. Drucker The main power base of paradigms may be in the fact that they are taken for granted and not explicitly questioned Johan Arndt What is needed is not an interpretation of the utility created by marketing, but a marketing interpretation of the whole process creating utility. Wroe Alderson

S-D Logic From Arm-Flapping to Airfoil Logic

S-D Logic Goods-dominant (G-D) Logic Purpose of economic activity is to make and distribute units of output, preferably tangible (i.e., goods) Goods are embedded with utility (value) during manufacturing Goal is to maximize profit through the efficient production and distribution of goods goods should be standardized, produced away from the market, and inventoried till demanded Firms exist to make and sell value-laden goods

S-D Logic Value Production and Consumption Producer Consumer Value Creation Value Destruction Supplier Supply/Value Chain Product/Value Delivery Goods/Money

S-D Logic Services: The G-D Logic Perspective

S-D Logic Problems with Goods Logic

S-D Logic G-D Logic Background

S-D Logic G-D Logic Background (2)

S-D Logic What Has Changed? Nothing and Everything

S-D Logic A Partial Pedigree Services and Relationship Marketing e.g., Shostack (1977); Berry (1983); Gummesson (1994) ; Gronroos (1994); etc. Theory of the firm Penrose (1959) Core Competency Theory (Prahalad and Hamel (1990); Day 1994) Resource-Advantage Theory and Resource- Management Strategies Hunt (2000; 2002); Constantine and Lusch (1994) Network Theory (Hakansson and Snehota 1995) Interpretive research and Consumer Culture theory (Arnould and Thompson 2005) Experience marketing (Prahalad and Ramaswamy 2000)

S-D Logic Service-Dominant Logic Basics

S-D Logic Foundational Premises (Revised) PremiseExplanation/Justification FP1Service is the fundamental basis of exchange. The application of operant resources (knowledge and skills), “service,” is the basis for all exchange. Service is exchanged for service. FP2Indirect exchange masks the fundamental basis of exchange. Goods, money, and institutions mask the service-for-service nature of exchange. FP3Goods are distribution mechanisms for service provision. Goods (both durable and non-durable) derive their value through use – the service they provide. FP4Operant resources are the fundamental source of competitive advantage The comparative ability to cause desired change drives competition. FP5All economies are service economies. Service (singular) is only now becoming more apparent with increased specialization and outsourcing.

S-D Logic Foundational Premises (Revised) PremiseExplanation/Justification FP6The customer is always a co-creator of value Implies value creation is interactional. FP7The enterprise can not deliver value, but only offer value propositions The firm can offer its applied resources and collaboratively (interactively) create value following acceptance, but can not create/deliver value alone. FP8A service-centered view is inherently customer oriented and relational. Service is customer-determined and co- created; thus, it is inherently customer oriented and relational. FP9All economic and social actors are resource integrators Implies the context of value creation is networks of networks (resource- integrators). FP10Value is always uniquely and phenomenological determined by the beneficiary Value is idiosyncratic, experiential, contextual, and meaning laden.

S-D Logic Resource Integration Market-facing Resource Integrators Private Resource Integrators Private Resource Integrators Public Resource Integrators Resource Integrator (individual, family, firm, etc.) Resource Integrator (individual, family, firm, etc.) Value Economic Currency Economic Currency Social Currency Social Currency Public Currency Public Currency New Resources New Resources

S-D Logic Clarifications: Service vs. Services Services = intangible products Service =The process of using one’s competences for the benefit of some party The application of knowledge and skills Service transcends “goods and ‘services’” G-D Logic S-D Logic There are No “Services” in Service-Dominant Logic

S-D Logic Service Beneficiary Provider of Operand & Operant Resources Direct Service Provision Direct Service Provision Service Provision via Goods Value in Context Cocreation of Value Integration With Public- Facing Resources Integration With Public- Facing Resources Integration With Private- Facing Resources Integration With Private- Facing Resources Coproduction Clarifications: Cocreation vs. Coproduction Coproduction is relatively optional. Value is always cocreated

S-D Logic What S-D Logic Might be

S-D Logic Service Exchange through Resource Integration and Value Co-creation Resource Integrator/ Beneficiary (“Firm”) Resource Integrator/ Beneficiary (“Customer”) Value Co-creation Market-facing and public and private resources Service Market-facing and public and private resources $ (Service Rights) Value Co-creation = Resource Integrators

S-D Logic Markets (and Market Actors) as Service Systems Resource Integrator/ Beneficiary (“Firm”) Resource Integrator/ Beneficiary (“Customer”) Service Systems

S-D Logic An Extended Pedigree Social Network Theory e.g., Giddens (1984); Granovetter (1973) New Institutional Economics North (2005); Menard (1995) Human Ecology e.g., Hawley (1986); Business Ecosystems Insiti and Levien (2004) Stakeholder Theory Donaldson and Preston (1995) Service Science e.g., Spohrer and Maglio (2008) Market Practices and Performances Araujo (2008), Kjellberg and Helgesson (2008)

S-D Logic What is needed Foundations for Positive theory Shift from products as unit of analysis to collaborative value creation and determination B2B, service, and relationship Refocus on operant resources as source of value Resource-based theories of the firm; resource advantage theory Elimination of producer/consumer distinction B2B marketing/network theory Inframarginal analysis Models of emergent structure and processes Complexity theory Interpretive research Theory of resource integration and exchange Theory of the market to inform normative marketing theory

S-D Logic The Market, Marketing, and Economics Other disciplines have found it convenient to institutionalize the distinctions between applied and basic science... In marketing, the problem is rather one of spinning off a basic science from a problem solving discipline. (Arndt 1985) “Paradoxically, the term market is everywhere and nowhere in marketing.” Venkatesh, Penaloza, and Firat (2006) It is a peculiar fact that the literature on economics…contains so little discussion of the central institution that underlies neoclassical economics – the market North (1977)

S-D Logic Issues for a Theory of the Market The performative nature of markets The market is a function of the marketing (and other business disciplines) e.g., Araujo (2009) Markets do not exist They are images of service potential Markets as practices e.g., Kjellberg and Helgesson ( 2008) …and yet they do Intersubjective realities Intuitions

S-D Logic Markets: Shared or (Co)Created The MP3-Player Market Or The customizable- entertainment- storage- organizer-and-personal- assistant-and-life- applications-with-a- WOW-factor-platform market The mineral-oil market Or The baby-butt-rash-avoidance- mommy-guilt-reducing- body-massage-and- sexual-lubricant market The sodium- bicarbonate market Or The occasional-baking- But-primarily-refrigerator- freshening-teeth-cleaning- clothes-brightening market

S-D Logic The Messages of S-D Logic

S-D Logic The Messages of S-D Logic (2)

S-D Logic Key S-D Logic Publications

Frontiers in Service Conference World’s leading annual conference on service research in its 18 th year Honolulu, Hawaii, Oct. 29 – Nov. 1, 2009 Hosted by the Shidler College of Business, University of Hawaii at Manoa 304 abstracts submitted, 39 countries Emphasis on Service Science trend Brian Arthur and John Seely Brown confirmed plenary speakers Center for Excellence in Service

S-D Logic For More Information on S-D Logic visit: sdlogic.net We encourage your comments and input. Will also post: Working papers Teaching material Related Links Steve Vargo: Bob Lusch: Thank You!

S-D Logic Resource Integration: The Practices Perspective Partially adapted from Kjellberg & Helgesson (20056

S-D Logic The New Fractal Geometry of the Market Value Co-creation Value Co-Creation Resource Integration Resistance Reduction Exchange Customers Needs Resources Resistances RI Stakeholders Needs Resources Resistances RI External Resources Needs Resources Resistances RI

37 S-D Logic Influence on Service Science Resource Integrator/ Beneficiary (“Firm”) Resource Integrator/ Beneficiary (“Customer”) Value Co-creation Value Configuration Density A. Service Provider Individual Organization Public or Private C. Service Target: The reality to be transformed or operated on by A, for the sake of B People, dimensions of Business, dimensions of Products, goods and material systems Information, codified knowledge B. Service Client Individual Organization Public or Private Forms of Ownership Relationship (B on C) Forms of Service Relationship (A & B co-create value) Forms of Responsibility Relationship (A on C) Forms of Service Interventions (A on C, B on C)  Understanding service and service innovation requires new abstractions.  Service is the application of competence for the benefit of another.  Service involves at least two entities, one applying competence and another integrating the competences with other resources and determining benefit (value co-creation) – these interacting entities are service systems.  A service system is a dynamic value co-creation configuration of resources, including people, organizations, shared information, and technology connected to other service systems by value propositions.  A service interaction includes proposal, agreement, and realization.  An atomic service system has no service systems as operand resources. Source: Maglio (2009)

S-D Logic

39 S-D Logic Influence on Service Science (2) Given our service system abstraction and the service- dominant logic on which it depends, we can define service science and its variations: Service science is the study of the application of the resources of one or more systems for the benefit of another system in economic exchange. Normative service science is the study of how one system can and should apply its resources for the mutual benefit of another system and of the system itself. Service science, management, and engineering (SSME) is the application of normative service science. Source: Maglio 2009

S-D Logic The Source of the “New” Service(s) Economy

S-D Logic Potential Implications

S-D Logic Potential Implications (2)

S-D Logic What is needed Foundations for Positive theory Shift from products as unit of analysis to collaborative value creation and determination B2B, service, and relationship Refocus on operant resources as source of value Resource-based theories of the firm; resource advantage theory Elimination of producer/consumer distinction B2B marketing/network theory Inframarginal analysis Models of emergent structure and processes Complexity theory Interpretive research Theory of resource integration and exchange Theory of the market to inform normative marketing theory

S-D Logic Service Ecosystems An economic community supported by a foundation of interacting organizations that co-create value through service exchange. It includes: “Suppliers” “ “Producers” Competitors Customers Customer’s network of resources Other social and economic stakeholders

S-D Logic Lego

S-D Logic Boeing

S-D Logic

S-D Logic Threadless.com

S-D Logic Relatively new brand, actively solicits and applies user input from the onset Largely inorganic - corporately created brand community Consumer packaged good Jones Soda

S-D Logic Firefox: Consumer Generated Content

S-D Logic Free open source platform Cross-platform browser Supports MS Windows, Linux, Mac OS X As of September 2007 %15 of US users %28 of European users Firefox

S-D Logic How is Firefox spreading? Word of mouth- many people are passionate about it Company runs contests for consumer generated ads Consumers run their own campaigns to spread Firefox Firefox

S-D Logic Sub-disciplinary Divergences and Convergences

S-D Logic What S-D Logic is Not

S-D Logic What Has Changed? IT & ICT

S-D Logic Markets (and Market Actors) as Service Systems Resource Integrator/ Beneficiary (“Firm”) Resource Integrator/ Beneficiary (“Customer”) Service Systems

S-D Logic Service Ecosystems An economic community supported by a foundation of interacting organizations that co-create and exchange service. It includes: “Suppliers” “ “Producers” Competitors Customers Other social and economic actors

S-D Logic An Extended Pedigree Social Network Theory e.g., Giddens (1984); Granovetter (1973) New Institutional Economics North (2005); Menard (1995) Human Ecology and Business Ecosystems e.g., Hawley (1986); Insiti and Levien (2004) Stakeholder Theory Service Science e.g., Spohrer and Maglio 2008

S-D Logic Marketing and Market Science Other disciplines have found it convenient to institutionalize the distinctions between applied and basic science... In marketing, the problem is rather one of spinning off a basic science from a problem solving discipline. (Arndt 1985) “Paradoxically, the term market is everywhere and nowhere in marketing.” Venkatesh, Penaloza, and Firat (2006) It is a peculiar fact that the literature on economics…contains so little discussion of the central institution that underlies neoclassical economics – the market North (1977)

S-D Logic Marketing’s Inverted Foundation

S-D Logic The Value Proposition: There are alternative logics for understanding markets, marketing, and management One is more robust and better suited to the long-term viability and application.

S-D Logic Forum on Markets and Marketing: Extending S-D Logic (Dec. 4-6) Sponsor: Australian School of Business, UNSW Major Themes Marketing Systems Grand or General Theory of the Market & Marketing Marketing and Value(s) Joint, Special-Issue Journal Publication Australasian Marketing Journal European Journal of Marketing Marketing Theory Journal of Macromarketing

S-D Logic Continuing Misconceptions Reflection of the transition to a services era In S-D logic, all economies are service economies Replacing goods with services as the basis of exchange S-D logic is grounded in “service” (a process) not “services” (intangible units of output) The meaning of co-creation of value Superordinate to co-production A Theory S-D logic is a logic, a mindset, a lens, but not a theory

S-D Logic Provider of Operand & Operant Resources Direct Service Provision Service Beneficiary Service Provision via Goods Value in Context Cocreation Integration With Public- Facing Resources Integration With Public- Facing Resources Integration With Private- Facing Resources Integration With Private- Facing Resources Coproduction

S-D Logic Sub-disciplinary Divergences and Convergences

S-D Logic A Partial Pedigree Services and Relationship Marketing e.g., Shostack (1977); Berry (1983); Gummesson (1994) ; Gronroos (1994); etc. Theory of the firm Penrose (1959) Core Competency Theory (Prahalad and Hamel (1990); Day 1994) Resource-Advantage Theory and Resource- Management Strategies Hunt (2000; 2002); Constantine and Lusch (1994) Network Theory (Hakansson and Snehota 1995) Interpretive research and Consumer Culture theory Experience marketing (Prahalad and Ramaswamy 2000)

S-D Logic 67 Key Related Works Vargo, S. L. and R.F. Lusch (2004) “Evolving to a New Dominant Logic of Marketing,” Journal of Marketing Harold H. Maynard Award for “significant contribution to marketing theory and thought.” Vargo, S.L. and R. F. Lusch (2004) “The Four Service Myths: Remnants of a Manufacturing Model” Journal of Service Research Lusch, R.F. and S.L. Vargo, editors (2006), The Service-Dominant Logic of Marketing: Dialog, Debate, and Directions, Armonk, NY: M.E. Sharpe Vargo, S.L. and R.F. Lusch (2007) “Service-Dominant Logic: Continuing the evolution?, Journal of the Academy of Marketing Science

S-D Logic Resource Integration and Value Co- creation Opportunities Resource Integrator/ Beneficiary (“Firm”) Resource Integrator/ Beneficiary (“Customer”)

S-D Logic Offerings as Platforms Recreation Ecosystem Platform Ecosystem Platform Meaning Access to resources Entertainment Knowledge Recreation Facilitation Stimulation Inspiration Social connectedness Self image Social identity

S-D Logic What S-D Logic Might be

S-D Logic G-D Logic: A Logic of Separation Producer Consumer Separation

S-D Logic S-D Logic: A Logic of Cocreation Cocreating Firm Customer

S-D Logic Uneasiness with Dominant Model “The historical marketing management function, based on the microeconomic maximization paradigm, must be critically examined for its relevance to marketing theory and practice.” Webster (1992) “The exchange paradigm serves the purpose of explaining value distribution (but) where consumers are involved in coproduction and have interdependent relationships, the concern for value creation is paramount…There is a need for an alternative paradigm of marketing.” Sheth and Parvatiyar (2000) “The very nature of network organization, the kinds of theories useful to its understanding, and the potential impact on the organization of consumption all suggest that a paradigm shift for marketing may not be far over the horizon.” Achrol and Kotler (1999)

S-D Logic Problems with Goods Logic

S-D Logic Value Production and Consumption Producer Consumer Value Creation Value Destruction Supplier Supply/Value Chain Product/Value Delivery

S-D Logic Reflections of the G-D Logic

S-D Logic What S-D Logic is Not

S-D Logic Getting the Logic Right The greatest danger in times of turbulence is not the turbulence: it is to act with yesterday’s logic. Peter F. Drucker The main power base of paradigms may be in the fact that they are taken for granted and not explicitly questioned Johan Arndt Value Proposition: There are alternative logics for understanding markets and marketing One is more robust and better suited to the long- term viability of marketing

S-D Logic Domestication and Liquefication of Resources Drives Mobility From Somatic Mobility to Extra-Somatic Mobility From Lusch, R.F. (2008)

S-D Logic Evolution of Marketing & Web To Market To Market Web Plumbing Web Plumbing Marketing To Web 1.0 Retrieve & Read Web 1.0 Retrieve & Read Marketing With Web 2.0 Co-Create Web 2.0 Co-Create

81 Service Science is about building common language An analogy can be made with Computer Science. The success of CS is not in the definition of a basic science (as in physics or chemistry for example) but more in its ability to bring together diverse disciplines, such as mathematics, electronics and psychology to solve problems that require they all be there and talk a language that demonstrates common purpose. Service Science may be the same thing, only bigger: an interdisciplinary umbrella that enables economists, social scientists, mathematicians, computer scientists and legislators (to name a small subset of the necessary disciplines) to cooperate to achieve a larger goal - analysis, construction, management and evolution of the most complex systems we have ever attempted to construct. Source: Maglio (2009)